In recent years, many of the traditional pillars of the Hong Kong economy - notably manufacturing and real estate - have experienced a steady decline. At the same time, and sometimes hand-in-hand with that decline, many labour-intensive economic activities in both the manufacturing and service industries have migrated to mainland China. The result has been an increasingly urgent quest for new ways - and new industries - to ensure Hong Kong’s continued economic prosperity.

But this crossroads that we’ve reached in our economic development is nothing new: over the last two decades many major trading ports in mature economies have been confronted by similar problems. In many of these cases, the logistics industry emerged as one of the few genuine and viable ways to provide the sustainable growth these port cities were looking for - and Hong Kong is now following these examples.

Releasing hidden value

As Hong Kong Logistics Association (HKLA) President Anthony Wong puts it, logistics essentially involves the scientific management of the whole process of moving goods from the supplier to the end-consumer. It strives for maximum efficiency and cost advantage in every procedure in order to unlock more hidden values in the trade that is being enacted.

”When it comes down to discussions on logistics,” he says, “a lot of people confine their thinking to ‘port’ logistics. In fact there is more value hidden in the realms of material management and physical distribution.

“Imagine you have 500 suppliers selling goods to 500 customers. If every supplier was o move goods to all these customers, there would be a total of 500 x 500 or 250,000 journeys. But if we establish a distribution centre that receives goods from the 500 suppliers, and which can arrange and send the goods to the 500 customers according to their orders, we need only 500 + 500 or 1,000 journeys,” says Mr Wong.

The advent of information and communications technology in the last decade has equipped the logistics industry with more muscle and an impressive capability to respond to changes in customer demand in a timely and efficient way. The end result is a dramatic improvement in suppliers’ inventory management.

This, Mr Wong adds, has triggered a massive transformation in manufacturing and distribution processes, and has created a better match between supply and demand that has resulted in a huge reduction in the need to build extensive and costly inventories.

A smarter response

Modern logistics management focuses on two primary ways of extracting huge gains from overhauling the old processes: inventory management and delayed configuration.

Experiences in Europe showed that consolidating inventory into fewer locations can substantially reduce total inventory requirements, resulting in enhanced competitiveness. Indeed, the advantage of managing worldwide inventories on a centralised basis is widely recognised, even though centralised systems can lead to higher transportation costs.

Postponement, which is also known as delayed configuration, is another logistics strategy that can be effective in achieving the cost-reducing benefit of standardisation while maximising marketing effectiveness through localisation.

This strategy is based on the principle of designing products using common platforms, components or modules, yet handling final assembly or customisation at the final market destination, where consumer preferences are best known. In most cases, regional distribution centres are located near airports or seaports so that changing demand can be met with agility, reliability and flexibility.

Mr Wong says the development in logistics at the intra- and inter-regional levels has been so rapid in recent years that selected major retail chains are able to take advantage of it to improve their cash flow management in addition to the benefits of cost reduction.

“Better logistics management can actually allow a retailer to postpone his order from suppliers to the very last minute - even after he has confirmed the order. In this way, he can have this purchase from suppliers, usually settled from 30 up to even 120 days after delivery, financed upfront from the sales revenue.”

The China link

But Mr Wong adds that despite the pledge by the SAR Government to develop logistics as one of Hong Kong’s new pillar industries, and the fact that Hong Kong’s airport logistics are the most efficient in the world, Hong Kong is still lagging behind other major regional and international logistics centres in terms of educational infrastructure.

“When we, founding members, established the Hong Kong Logistics Association some eight years ago, no tertiary education institution was offering courses in logistics. Then we helped them tailor the curriculum for different course structures and recruit teaching staff. The training platform for logistics management is now in much better shape than ever before,” he said.

The shortage of educational resources is even more acute in mainland China, where as many as 30,000 experts are needed every year.

Recent research has indicated that China’s domestic air cargo market will be the fastest growing market in the world, averaging 10.3% growth per year for the period 2001 to 2021. Demand for third-party services in the PRC is expected to escalate now that China is a member of the World Trade Organization (WTO), and as it reinforces its current position to become the biggest manufacturing centre in the world.

According to the WTO provisions, China is required to lift restrictions on wholesaling and retailing within three to five years. This will open its domestic logistics market to competition from foreign players.

At the moment, distribution and logistics costs in China are still high. The current logistics operators in China are far behind in terms of management, organisation and technology, so there is a huge demand for reliable and cost-effective logistics solutions.

Influenced by the long-standing centrally planned economic policy, most Chinese enterprises still operate on the basis of self-sufficiency in all processes, from materials procurement to product distribution. Most enterprises still maintain large logistics facilities. However, the services generated from these facilities are far from satisfactory.

A “third party” logistics industry of independent, specialized service suppliers is still in its infancy, but currently the providers are capable of offering only basic services like conveying and storage. They are still way behind their foreign counterparts in terms of sophisticated value-added offerings - such as consignment, logistics information, inventory management and cost control - let alone higher-level services like logistics scheming and systematic logistics services.

Mr Wong says that every week HKLA receives, on average, one or two delegations from China, who come to gather management expertise and general knowledge of logistics.

Challenges at home

Being a proactive association representing the interests of participants in the logistics industry, the HKLA also collects opinions from its members and passes on to the government their ideas about the prospects of the industry.

“Probably the next major task for the local industry is to shape ourselves so that we tap the market for logistics services that involve higher-value products. These demand better service quality and reliability.

“We are losing our market share in the handling of low-value, high volume goods. For example, if the difference in the price between exporting a container from Hong Kong or from ports in China is US$300, and a mainland-based manufacturer needs to export 100 containers a month, he doesn't need knowledge in rocket science to decide to use mainland ports and pocket the difference. The aggregate is US$360,000 a year.”

Mr Wong says as far as port logistics is concerned Hong Kong is losing its edge in the handling of goods valued at less than US$100,000 per container. However, the market segment for high-value merchandise handling is also a tough battlefield.

“We need to shape up every member in our supply chain to provide premium, reliable services that justify the price we charge our clients. We are not in the business of competing on price; we are competing with other supply chains on service quality.”

The competitive advantage of Hong Kong’s airport logistics, however, should still last for 10 years or more. “We are fortunate that airport logistics capacity is not something you can add overnight.. However, we need to plan in advance where should we go when that challenge comes,” he says.

“Getting our positioning right is the key to survival,” Mr Wong emphasises.

Adding an edge through DTTN

The Hong Kong Logistics Association has been playing an instrumental role in contributing to the development of the Digital Trade and Transportation Network (DTTN).

DTTN is a project jointly led by the Hong Kong government and Tradelink. The electronic platform uses a “message format transformation function” to unify the various formats of electronic communication that are currently being used by different players in the supply chain. It overcomes the difficult issues that arise when different users have varied message formats and transmission protocols.

“HKLA is in full support of the DTTN initiative. We see this as a wake-up call for existing service providers who spend too much of their efforts in managing their operations without having enough awareness of their information technology capabilities.”

Mr Wong considers that this high level of awareness in IT capability is very important in customer retention. “All other things being equal, customers will switch to a provider with better IT capabilities, even though both can offer the same product at the same price.”